By Lucia Mutikani
WASHINGTON, Sept 25 (Reuters) – New orders for key US-manufactured capital goods increased more than expected in August and data for the prior month was revised sharply higher, pointing to another quarter of robust growth in business spending on equipment amid an artificial intelligence infrastructure buildout.
The upbeat report from the Commerce Department on Friday followed on the heels of a survey this week from S&P Global showing an acceleration in business activity in September. But concerns are emerging over the sustainability of the AI-related demand. Some industry leaders have called for regulation of the technology. There are also worries that rising oil prices, interest rates and long-term US Treasury yields because of the Middle East conflict will hurt manufacturing not tied to AI.
“The AI investment boom is real and it is carrying the economy along with it,” said Christopher Rupkey, chief economist at FWDBONDS. “Investment spending is considered a growth accelerator, but eventually the music will stop.”
Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, jumped 1.6% last month after an upwardly revised 0.6% increase in July, the Commerce Department’s Census Bureau said.
Economists polled by Reuters had forecast these so-called core capital goods orders rising 0.5% after a previously reported unchanged reading in July. Core capital goods orders increased 10.6% year-on-year in August.
Last month’s increase was led by a 1.1% rebound in orders for electrical equipment, appliances and components. While overall orders for computers and electronic products were unchanged, individual components showed strength.
Orders for computers and related products soared 1.5% and were up 20.1% on a year-on-year basis. Orders for communications equipment rose 0.3% and surged 35.8% on a year-on-year basis.
Machinery orders increased 1.1%, while bookings for primary metals vaulted 1.2%. But orders for fabricated metal products decreased 1.3%. Aside from AI, business spending on equipment has also been supported by tax incentives in last year’s big tax legislation as well firms front-loading orders to avoid higher prices from import tariffs and the Middle East conflict.
Some economists said there were already signs that capital spending was slowing, pointing to a moderation in measures of capital expenditure plans in regional Federal Reserve manufacturing surveys.
“But we would caution that the growth rate of new investment could slow when activity and spending levels are already so high,” said Veronica Clark, an economist at Citigroup. “We see some early signs that this slowing growth may be occurring in recent manufacturing sector data.”
Shipments of core capital goods, which go into the calculation of the business spending on equipment component in the gross domestic product report, increased 0.6% last month after advancing 1.4% in July.
Overall non-defense capital goods orders rose 1.2%, though shipments fell 1.3% after hefty gains in the prior months. Business spending on equipment has notched two straight quarters of double-digit growth, a streak that economists at JP Morgan and Goldman Sachs believed extended into the third quarter.
Goldman Sachs lifted its GDP growth estimate for the July-September quarter to a 3.4% annualized rate from a 3.3% pace. The economy grew at a 1.5% rate in the second quarter.
CONSUMERS ENGAGING IN PRE-EMPTIVE BUYING
Lofty growth estimates for this quarter also reflect strong consumer spending, despite high inflation stemming from the US-Israeli war with Iran.
Spending is likely to remain high, in part as consumers pull forward purchases in anticipation of further price increases.
A survey from the University of Michigan on Friday showed an improvement in buying conditions for durables this month “in part due to a perception that completing such purchases now would help consumers avoid higher prices in the future.”
The Surveys of Consumers’ Consumer Sentiment Index fell to a final reading of 48.1 in September, a four-month low, from 51.7 in August. Consumer expectations for inflation over the next year increased to 4.6% from 4.0% in August.
The combination of strong demand and rising inflation gives the Federal Reserve scope to raise interest rates again this year. The US central bank last week hiked its overnight benchmark interest rate by 25 basis points to the 3.75%-4.00% range, the first hike in three years, and flagged further increases in borrowing costs in the months ahead.
Financial markets are pricing in a roughly 68.6% chance of another rate increase next month, CME’s FedWatch tool showed.
AI enthusiasm is driving investor sentiment, detracting from higher oil prices and rising US Treasury yields. Stocks on Wall Street were trading higher. The dollar slipped against a basket of currencies. US Treasury yields rose.
Orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, were unchanged last month after rising 0.9% in July. They increased 7.7% year-on-year in August. Durable goods were over the month restrained by a 0.6% drop in transportation equipment orders.
Motor vehicles and parts orders fell 0.6%, while the volatile civilian aircraft orders component dropped 4.3%. Boeing reported on its website that it had received 15 orders for commercial aircraft, down from 38 in July.
Some economists are optimistic that business investment will weather the rising energy prices, marked by record high diesel prices, and higher borrowing costs, shielded by strong profits.
“The renewed rise in oil prices and long-term yields is a downside risk, but business equipment investment ought to shrug these risks off for the time being,” said Bernard Yaros, lead US economist at Oxford Economics.
“Corporate profit margins are at record highs and the AI investment boom is increasingly spilling over into durable goods beyond information-processing equipment.”
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)
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